Monday, March 2, 2009

Some Recent Thoughts

o start off, I want to announce that I might be posting less in the future, because during the recent time, I have become less interested in military aviation and naval shipbuilding. I have never posted as passionately as some other bloggers and I do apologize if the quality of my posts go down as a result of this.

There are just a lot of things politically these days that I think we could explore here. I think it's important to talk about some of the implications of the new Obama administration in China & US relationships. I'm sure most of you caught the fact that Hilary Clinton went to East Asia and made the all important China stop in her first oversea stop as the Secretary of the State. In many ways, it was amazing the transformation in the relationship between the two countries from the 90s when she was the first lady to now. The visit showed the growth of China's economic, political power and national strength during this period. I don't think I'm only speaking for myself when I say that it looked like Hilary basically got on her two knees and begged China to give USA more money. All the human rights associations were outraged by what they perceived to be a retreat by this administration toward China's human right violations. What they don't seem to see is that the fundamentals of China's relation with the West has changed with the latest economic troubles. For the first time since opening up in 1978, the West needs China more than China needs the West. In the past, Chinese gov't generally listened to Western lectures on trade practices, democracy, raw of law and free market principles. With the latest change, the West has lost its moral and economical authority over China. Despite the speculations by numerous Western economists that Chinese society is having growing unrest over its own economic problems, I really think it could not be further away from truth. From talking to everyone back at home and those who recent just came out, the general population still supports the totalitarian regime, which has become more of a populist regime in the recent years. From its coverage of the Tibetan unrest, it's clear that the Politburo is far more concerned about domestic support than international opinion. China falling apart is about as likely as Alberta leaving Canada or Alaska leaving USA.

Having established Chinese gov't's stability at home and strength abroad, will it take up the offer of a much weakened US gov't for a partnership in coming out of this depression that we are just falling into? First of all, the Chinese central bank knows what's going to happen with the Obama administration passing more bail outs, running up larger budget deficit and generally going deeper into debt. With so much extra liquidity injected into the system, we will start seeing inflation in the coming years and it will only lead to the destruction of the US dollar. The return that China gets on all those treasury bonds and agency bonds really can't cover the drop in the purchasing power of USD in the coming years. The problem is that if China stops adding to their treasury portfolio, the treasury will be forced to issue more debt and sell that to the Feds (which they have already started doing) or increase the yield to attract more buyers. I don't profess to be an economist, so much of what I say are thoughts based on what I read and hear. In the former case, you are using borrowed money to artificially keep up the price of treasury. But the problem is that this will simply deplete the money that the Feds has in its reserves in the long run. So, you are forced to go with the second option of increasing the yield to attract more buyers. Unlike Japan in the 90s, Americans don't have enough savings to buy all those treasury bonds. So, they would have to issue higher coupons or sell them at a bigger discount to attract foreign buyers and the more high risk domestic investors. The higher yield would increase the national debt over the long run. All of this would lead to a further destruction of the US dollar and decrease the economic strength of America. If you look at the Weimar Republic in the 20s or Zimbabwe right now, those are two extreme cases of what such reckless economic policy can lead to. With that in mind, should China really help the current administration to continue financing this huge budget. Think about it this way, would the US defense budget be increasing every year if they don't have foreign buyers investing in the treasury? Right wing hawks often talk about China using the money it got from trade surpluses for its military expansion, but it's actually the other way around. Without China buying Treasury bonds, would America be able to invest as much money in all these expensive defense projects? So, I think what China should do is to stop buying as much treasury bonds (which you are already seeing from the Japanese), buy more gold, silver, oil and natural resources around the world. And hope that US will learn to swallow the hard pill, start cutting down the size of the gov't and reduce these huge deficit.

The other part which I think is really interesting is China's recent shopping trip to Europe. Much was made out of the orders the Chinese delegation signed in Germany, Britain and Switzerland. I think China needs to show to the world that it's committed to free trade and not protectionist policies at such uncertain times. The Chinese economy have basically depended on selling goods to other countries for a long time and it will need to continue to trade with other countries to get out of the "recession" that it is in. I would expect such a trip to also be made to North America to ease the possible protectionist measures of the current administration.

no, he should not be cutting taxes, that just increases account deficit, he needs to cut spending. That's the problem with Americans, they don't spend, all they do is spend. And the gov't seems to know nothing but spend too. That's why it's a good thing Chinese gov't is not increasing on their stimulus package. These things are jokes.

Well, its good that you posted this. I wanted to do a blog on china's economic development too but just was too lazy to get around it.

PLA development will take decades and we not going to see a modern military vis-a-vis USA anytime soon.

China is changing tremendously. I go there every year and am amazed by the changes in the cities I visit.

I am also very impressed by Premier Wen's interview with CNN Fareed Zakaria.

While its only understandable that a lot of Chinese are outraged by the West sometimes hostile policies against it, leaders like Wen & Hu know that China's development depends a lot on the West and to a lesser extent Asian markets.

So far, China willingness to bear with the insults while resolutely defending her right to develop according to her own conditions have paid off.

Dengs advice on LYING LOW AND CONCEALING OUR STRENGTH are very wise words.

China now, due to the West incompetence is very much stronger and as long as she continues her wise policies is bound to be a giant of Asia in decades to come.

As for the US$, I think Zhou Xiaochuan remark that "we have to watch the country where the meltdown started" in relation to the RMB exchange rate tells us that China is watching the US$ very carefully.

This is the answer to a foreign reporters question on whether China will devalue the RMB.

I might talk more about economic part of China/USA relationship as time goes on, because that has become a passion of my too now. I work in financial area in New York, so I do a lot of reading and listening on this on a daily basis.